Guest Post: The Return Of Economic Weakness

Here is a number for you: 70% That is roughly how many economic reports have missed their mark in the last month. Why is this important? Believe it or not - It has a lot to do with the weather. We have written many times recently about the weather related effects skewing the seasonal adjustment figures in everything from the leading indicators and retail sales to employment numbers. Now those weather related boosts are beginning to run in reverse as weather patterns return to normal and realign with the seasonal adjustments.

This resurgence of economic weakness is only just beginning to appear in the fabric of the various manufacturing reports. The Chicago Fed National Activity Index (a broad measure of 85 different data points) has declined from its recent peak in December of .54 to .33 in January and -.09 in February. The ISM Composite index (an average of manufacturing and non-manufacturing data), Richmond, Dallas and Kansas Fed Manufacturing indexes all posted declines in March.

This weakness has now shown up in our Economic Output Composite Index (EOCI) which declined in March to 36.53 from 42.08 in February. This decline marks the first decline since the August 2011 economic bottom that was created by the Japanese earthquake/debt ceiling/Greek default trifecta. The restart of manufacturing cycle, combined with pent up demand, unseasonably warm weather and more liquidity injections by the Federal Reserve and the ECB, boosted the economy sharply in the 4th quarter of 2011.

Last summer marks the second time in the history of the EOCI that the indicator fell below the 30 mark without the economy either in, or about to enter, a recession. Back in 1967 the economy struggled briefly before slipping into recession. The recent recovery from a sub-30 reading was a function of massive liquidity injections which created a "start and stop" recovery. While the hope over the last several months has been that the economy was beginning to recover on an organic basis - the reality is that as the current round of liquidity runs it course economic weakness will once again prevail.

However, while Wall Street may be fervently optimistic on the economy, Main Street maintains a different view. Recent data on the small business environment, as released by the National Federation of Independent Business for March, paints a similar picture to the EOCI index. While the NFIB index has grown in each of the last 6 months in March nine of the ten index components dropped with the most notable dropw in hiring plans and expected real sales growth.

"March came in like a lion, with Main Street seeing significant job growth in March—but it appears to have gone out like a lamb, and with no cheer in the forward-looking labor market indicators. What could have been a trend in job growth is more likely a blip," said NFIB Chief Economist Bill Dunkelberg. "And what looked like the start of a recovery in profits fizzled out. The mood of owners is subdued—they just can't seem to shake off the uncertainties out there, and confidence that the management team in Washington can deal with the effectively is flagging. What we saw in March is painfully familiar – this was the same pattern of growth followed by months of decline from 2011. History appears to be repeating itself—and not in a good way."

The issue for small businesses is an interesting one. For them they are dependent ultimately on the consumer. Small businesses need sufficient demand from their customers to begin to increase permanent employment, expand facilities and produce more. This is why "poor sales" remains one of the primary concerns for small businesses and tracks closely with unemployment. The consumer, however, is dependent upon those businesses for employment in order to consume. This "tug-o'-war" keeps the economy from gaining the much needed "escape velocity" for an organic recovery.

However, this is where the weather related effect fills in the backstory. While consumer spending has been strong over the last few months, and has been a main driver of the recent recovery during that period, the weather had a huge factor to play in it. The unseasonably warm winter, the warmest in the last 65 years, provided a roughly $30 Billion dollar tax credit to consumers as heaters remained off driving normal utility costs lower. That effect, tied with the effective $60 billion tax credit from near $3 a gallon gasoline last summer, has provided a real boon to consumer's bottom line.

The warmer weather also allowed for a higher percentage of individuals to get to work that are normally absent due to inclement weather. Therefore, those individuals that depend on hourly wages for their labor had more income than usual to spend. It also provided a boost to construction and other manufacturing related jobs which are normally slowed by winter weather and required increases in temporary labor which boosted employment.

The latest employment report, which showed a sharp decline in job growth, also hints at the effect of the warm weather. The small increases in employment that are normally factored in by seasonal adjustments skewed the overall employment data to the positive. In the next couple of months as the seasonal weather patterns return to a more normal state, in Texas that would just be categorized as "hot", the seasonal adjustments will begin to realign themselves. This realignment will show up as a renewed weakness on the employment front an will raise concerns of a much weaker economic environment.

Furthermore, while we saw these weather related effects boost employment and consumption during the last few months which raised hopes of a recovering economy - those increases in consumption were not driven by stronger growth in disposable incomes. Incomes on a year over year basis have begun to decline and as a result consumption has growth through the expansion of credit and reduced savings rates. That trend is unsustainable longer term.

Whether were are talking about the consumer, housing or small business, the one link between all three is that they are still mired at very recessionary levels. Like a patient who has just come off of the operating table - the immune system is weak and extremely vulnerable to infection. The economy, much like a patient trying to come of life support, is extremely vulnerable to both internal and external shocks. The potential for another recession has actually increased in recent months even though it is not visible as of yet. There are far more headwinds than tailwinds today.

Markets don't run in one direction indefinitely - either up or down. The economy is a reflection of real employment, when you consider that 70% of the economy is made up of personal consumption, and ultimately the stock market is reflection of the economy. Therefore, while the markets and the real economy can detach from time to time, especially when driven by successive rounds of liquidity injections, reality will eventually play catch up with fundamentals. "Reversion" is the only truth that we can count on.

What do you all think of FAZ (triple short the S&P) as a buy right now (in addition to holding gold/silver/mining/food/etc)? I am thinking this is good protection against a 2008 style crash, plus AAPL is a bubble and it's toppy at the moment.

Thanks for responding specifically to my post. To be honest, I think we are all prepared for the long term, but what happens in the short term, like a 2008 style crash, gold down to $1400, silver down to $26.... mining stocks down 85%, S&P down 30%, etc etc....

PS: Mr. Dimon, I have Timmah and somebody he's referring to as Benji on the line (snicker)

long fucking pause

Jamie: (looks up from Archie-McFee catalog) Oh, fuck me, Deloris. Is it them again? How many times in one fucking day...

PS: I'll handle this Mr. Dimon. (big fucking toothy grin)

(picks up telephone)

PS: Gentlemen, Mr Dimon wishes me to inform you that he's just sat down on the gold commode from Mr. Bernake's office that was originally ordered by Mr. Thain, and has just begun eating a large double sausage and mushroom pizza and will be unavailable until after his nap.

(click)

PS: Oh for God's sake, courtesy flush, Jamie. You live in a barn?

Meanwhile, whilst Timmah and Ben could not respond to the now semi-empty seat once upon a time filled by Mr.Sack, desperately watching the prices of Gold and Silver skyrocket while equities approach their lower bound of the null set....

If you saw that chart on Zero Hedge a few days back "We are here" pointing to the next cycle lower, then this should be one of the best shorts on the planet to hold.

AAPL making up 36% of the S&P.....

FEAR vs. GREED? Sounds like you are FEAR.... but tell that to my mining stocks, down 20% YTD. Everyone talking about the sheep shearing coming to the markets (DOW etc) for an expected 20% drop... well I already got sheared and the markets (DOW etc) are "doing just fine".... should I expect an additional 20% shearing of what I have left when the DOW/S&P goes down?

If you could have shorted the S&P in 2008, would you have done so, or would you have clung to the mining stocks and lost 60, 70, 80%?

Then again, who knows when the next Flash Crash will be, or when President Nixon... ooops I mean Obama will one day make a speech declairing gold price to be $20,000/oz...

my classmate's sister makes $62 hourly on the laptop. She has been unemployed for 5 months but last month her pay check was $13843 just working on the laptop for a few hours. Read more on this web site .... http://bit.ly/FPPP3j

"Reversion [to the mean] is the only truth that we can count on." from the article above.

Point no. 1. Mean reversion is a widely observed phenomenon, but not a truth. The mean price of Rimm stock might be $50., but it is not a truth that it must revert to that mean. It might not even revert to it's 21 day moving average, until it goes to, and stays at, zero, for 21 days.

Point no. 2. Bulls use the same mean reversion justification for their optimism. They expect the U.S. economy to revert to 3% real GDP growth, and equiites to a long term average nominal growth of greater than 7%. Few of us here at ZH expect that to occur any time soon, despite it being a truth.

The beginning of the stock market reflecting the reality of the economic meltdown. And it's accompanied by wimpy watered-down articles like these. Americans don't face reality until it woops them in the butt.

As Winston Churchill once said, "You can always count on the Americans to do the right thing...........just after they've exhausted all other options!".

And it's accompanied by wimpy watered-down articles like these

Eh, the article isn't wimpy. I'd just file under: "SFOBV".

Furthermore, while we saw these weather related effects boost employment and consumption during the last few months which raised hopes of a recovering economy - those increases in consumption were not driven by stronger growth in disposable incomes. Incomes on a year over year basis have begun to decline and as a result consumption has growth through the expansion of credit and reduced savings rates.

Again, all this comes down to is: the working man's income. And if you look what happened right after the gold standard was axed in 1971, it's basically been stagnant, minus some up times during the 80s and late 90s. If people don't have income that keeps up with inflation to keep them comfortable, that's when the economic dam starts to break. The fact that the MSM and the politicans (minus Ron Paul and Bernie Sanders) do not fucking acknowledge this, really goes to show that A) they don't work for the working man and B) they are paid to NOT give a shit.

That's a recipe for disaster. I dont care how many drones, bunkers, or survaillence programs you have, Uncle Sam. Just ask King Louis in 1790s France what happens when the populace decides to lose their shit.

What would seem to be common sense to any average person, flies over the heads of economists at stratospheric levels.

THE ECONONMIC LANDSCAPE DOES NOT CHANGE ON A WEEKLY, MONTHLY OR EVEN QUATERLY BASIS. In fact on the ground of the real, even years do not mark real quantifiable change.

Since 2008 the true economy has barely budged from the bottom after the bursting of the last bubble. Those that were ruined are mostly still ruined. Those who are still employed, have been through the entire ordeal. Expectations may change wildly, but exectations are not reality.

If the market ever decides to price reality instead of expectations, we may see a real bottom and a real recovery. Of course pricing reality will cause the wealth produced by irrational expectation to evaporate. How will the rich survive?

economics is a social science that attempts to pretend to be a hard science just as sociology or psychology or g.d knows what else it is that they pretend to try to call it and claim that they have empirical evidence. bennie, (not that i expect or wish him ill will, but simply the fact that it is going to be a LONG time before anybody wants to hear anything from him) will be able to write something along the lines of 'where i went wrong'. the only way he will ever earn any $$ again. timmie will disappear, and hopefully big bad bama, jeez, i don't know. i hope he starts a cotton farm in the south. he would do well to learn the basics about running a business. jimmy carter could show him a few things.

:) big, big smiley on this one - i'm feeling pretty good today. that really is lots of fun.

oh - i know. timmie can help write tax return software, at this point, he must know a few in and outs as to the shortfalls of the tax software currently available. and of course my fave of all time. bill smudley. funny he didn't join his pal youngdahl (you youngun's need to look this up) in prison. he could of course help with the ipad recipes book.

Reversion..? A mis-speak I think...but, I do the same myself these days, now and then... found myself nodding to ice with the bourbon to match my seasonal blood temperature. Caught the mistake just in time. Take it neat or revert to nothing, I say.

This may be a "Managed Decline" of the market by the Fed, no hints of QE, no added juice, talk down the market a bit, to get oil back under control. 100 - 200 point down days for a week or two until wti and brent are at manageable levels for the start of driving season. Then very slow piump back up till election.

I am sorry you miss-understand me. Yes, I believe that markets are rigged to the upside for at least the last two years, and now I am saying there is a possibility of a managed decline, rigged to the downside, to reduce the pressure on oil.

What is organic growth? Is that when the economy produces enough revenue so the Fed and the Treasury don't have to pump in the equivalent of 10% GDP? Good luck finding any organic growth while we head down this road of endless QE.